Non Performing Assets of Indian Banking System and its ...

1 IOSR Journal of Economics and Finance (IOSR-JEF) e-ISSN: 2321-5933, p-ISSN: 7, Issue 6 Ver. III (Nov. - Dec. 2016), PP 21-26 DOI: 21 | Page Non Performing Assets of Indian Banking System and its Impact on Economy Pro. Rathore1, Malpani2, Sunita Sharma3 1 AMITY University Rajsthan ( Banking & Bus. Eco) College Rajsamand 3 Research Scholar AMITY Uniersty Jaipur I. Introduction of NPA Non Performing Assets Assets which generate income are called Performing Assets and but those do not generate income are called non- Performing Assets . A debt obligation where the borrower has not paid any previously agreed upon interest and principal repayments to the designated lender for an extended period of time. The nonperforming asset is therefore not yielding any income to the lender in the form of principal and interest example, a mortgage in default would be considered non- Performing .

2 After a prolonged period of non-payment, the lender will force the borrower to liquidate any Assets that were pledged as part of the debt agreement. If no Assets were pledged, the lenders might write-off the asset as a bad debt and then sell it at a discount to a collections asset becomes non- Performing when it ceases to generate income for the bank. A non- Performing asset (NPA) is defined generally as a credit facility in respect of which interest and / or installment of principal has remained past due for two quarters or more. An amount due under any credit facility is treated as past due when it has not been paid within 30 days from the due date. It was, however, decided to dispense with past due .Worried over rising bad loans, a Parliamentary Panel has suo motu decided to examine the non- Performing Assets of the public sector banks that touched Rs lakh crore at the end of December 2015. The combined net loss of 20 public sector banks (PSB) stood at Rs 16, crore for the fourth quarter ended March 2016 as bad loans situation worsened.

3 PSBs registered net profit of Rs 4, crore in the corresponding quarter NPA concept which effect from 31 March 2001. Accordingly, as from that date, a NPA shall be an advance where Interest and/or installment of principal remain overdue for more than 180 days in respect of a term-loan. The account remains out of order for more than 180 days, in respect of overdraft / cash credit (OD / CC). The bill remains overdue for more than 180 days in the case of bill purchased and discounted. Interest and / or installment of principal remains overdue for two harvest seasons, but for a period not exceeding two half years in the case of an advance granted for agricultural purpose. Any amount to be received remains overdue for more than 180 days in respect of other accounts. Objectives of the Study To study the status of Non Performing Assets of Indian Scheduled Commercial Banks in India To study the impact of NPAs on Banks.

4 To know the recovery of NPAS through various channels. To make appropriate suggestions to avoid future NPAs and to manage existing NPAs in Banks. II. Limitation of the Study The important limitations are as follows; The study of non- Performing Assets limited to the Indian Bank and till the end of the year 2015 The basis for identifying non- Performing Assets is taken from the Reserve Bank of India Publications. NPAs are changing with the time. The study is done in the present environment without foreseeing future developments. Scope of the Study The study has the following scope: The study could suggest measures for the banks to avoid future NPAs & to reduce existing NPAs. The study may help the government in creating & implementing new strategies to control NPAs. The study will help to select appropriate techniques suited to manage the NPAs and develop a time bound action plan to check the growth of NPAs. Non Performing Assets of Indian Banking System and its Impact on Economy DOI: 22 | Page III.

5 Review of literature Kaur K. and Singh B. (2011) in their study on Non- Performing Assets of public and private sector banks (a comparative study) studied that NPAs are considered as an important parameter to judge the performance and financial health of banks. The level of NPAs is one of the drivers of financial stability and growth of the Banking sector. Chatterjee C., Mukherjee J. and Das (2012) in their study on Management of non- Performing Assets - a current scenario has concluded that banks should find out the original reasons/purposes of the loan required by the borrower. Proper identification of the guarantor should be checked by the bank including scrutiny of his/her (2012) in her study on Study on performance of NPAs of Indian commercial banks find out that corporate borrowers even after defaulting continuously never had the fear of bank taking action to recover their dues. This is because there was no legal framework to safeguard the real interest of banks Why Assets become NPA?

6 A several factors is responsible forever increasing size of NPAs in PSBs. The Indian Banking industry has one of the highest percents of NPAs compared to international levels. A few prominent reasons for Assets becoming NPAs are as under : Lack of proper monitoring and follow-up measures. Lack of sincere corporate culture. Inadequate legal provisions on foreclosure and bankruptcy. Change in economic policies/environment. Non transparent accounting policy and poor auditing practices. Lack of coordination between banks/FIs. Directed landing to certain sectors. Failure on part of the promoters to bring in their portion of equity from their own sources or public issue due to market turning unfavorable. Criteria for classification of Assets Table Net NPA and stress Assets till March 2016 NPA Net NPA% Gross NPA% Stressed Assets % Mar-13 Sep-13 Mar-14 10 Sep-14 Mar-15 Sep-15 Mar-16 Mar-17 The above table depict the % of Net ,Gross NPA and Stress Assets during the period 2013 to 2016 the % increase continuously.

7 It forecast that in 2017 it will reach at and it will be critical for Banking System . Figure;1 NPA, Gross NPA and Stress Assets of Non Performing Assets of Indian Banking System and its Impact on Economy DOI: 23 | Page Table No. 2 Indian banks and their NPA Bank NPA PNB 5300 CR UCO 1497CR Indian OVERSEAS BANK 1425 CR CENTRAL BANK OF INDIA 837CR DENA BANK 663CR 14 OTHER BANK 8883CR IDBI 1609CR Underlying reason for NPA in India An internal study conducted by RBI shows that in the order of prominence ,the following factor contribute to NPAs. Internal Factor Diversion of funds for - Expansion/diversification /modernization - Taking up new project - Helping /promoting associate concerns time/cost overrun during the project implementation stage Business Failure Inefficiency in management Slackness in credit management and monitoring Inappropriate Technology/technical problem Lack of coordination among lenders External Factor Recession Input/power storage Price escalation Exchange rate fluctuation Accidents and natural calamities, etc.

8 Changes in government policies in excise/ import duties, pollution control orders, etc. Some other factors also affected to NPA which are mention below in detail: Liberalization of economy/removal of restriction/reduction of tariffs A large number of NPA borrowers were unable to compete in a competitive market in which lower prices and greater choices were available to consumers. Further, borrowers operating in specific industries have suffered due to political, fiscal and social compulsions, compounding pressures from liberalization. Lax monitoring of credit and failure to recognize Early Warnings Signals It has been stated that approval of loan proposal is generally thorough and each proposal passes through many levels before approval is granted. However, the monitoring of sometimes complex credit files has not received the attention it needed which meant that early warning signals were not recognized and standard Assets slipped to NPA category without banks being able to take proactive measures to prevent this.

9 Partly due to this reason, adverse trends in borrowers performance were not noted and the position further deteriorated before action was taken. Over optimistic promoters Promoters were often optimistic in setting up large projects and in some cases were not fully above board in their intentions. screening procedures did not always highlight these issues. often projects were set up with the expectation that part of the funding would be arranged from the capital markets which were booming at the time of the project appraisal. When the capital markets subsequently crashed, the requisite funds could never be raised, promoter often lost interest and lenders were left stranded with incomplete/unviable projects. Directed lending Loans to some segment were dictated by Governments policies than commercial imperatives. Highly Leveraged borrowers Some borrowers were under capitalized and over burdened with debt to absorb the changing economic situation in the within a protected marked resulted economic situation in the country.

10 Operating within a protected market resulted in low appreciation of commercial/market risk. Non Performing Assets of Indian Banking System and its Impact on Economy DOI: 24 | Page Funding mismatch There are said to be many cases where loans granted for short terms were used to fund long term transactions. High Cost of Funds Interest rates as high as 20% were not uncommon. Coupled with high leveraging and falling Denmark, borrowers could not continue to service high cost debt. Willful Defaulters There are a number of borrowers who have strategically defaulted on their debt service obligation realizing that the legal resource available to creditors is slow in achieving results. NPA - Impact The problem of NPAs in the Indian Banking System is one of the foremost and the most formidable problems that had impact the entire Banking System .